Mumbai: The rupee on Wednesday reflected the movement in the stock markets, incurred early losses due to increased demand for the dollar but ended the day with a drop of half a percentage point.

The long-term movement of the rupee against the dollar is unlikely to be reversed by the recent move by market regulator, the Securities and Exchange Board of India (Sebi), to regulate foreign investors not registered with it, said people who deal in the currency market. “Today’s fall is an aberration in tune with stock market movements," said V. Krishnaswamy, general manager of Indian Overseas Bank, who oversees the bank’s foreign exchange operations. “In the short term, there may not be much appreciation." But, he said, the rupee would trade at between 38.5 and 39 to a dollar over the next six-nine months.

Sebi, in a discussion paper on offshore derivative instruments (participatory notes), had suggested ways to curb the “copious" inflow of overseas money into the stock market. It recommended phasing out of existing participatory notes over the next 18 months and discontinued further new ­issues.

Participatory notes are financial instruments used by foreign entities to invest in the Indian stock market, but are not registered with Sebi. “I think the foreign institutional investors (FIIs) have taken a view that they can comply with the new regulatory environment and that there is no panic required," said a top official of a public sector bank, who did not wish to be identified. Continued FII interest in the Indian stock market would ensure rupee appreciation, he added.

In intra-day trade, the partially convertible rupee dipped as much as 1.6% to 39.98 a dollar, but closed at 39.55, or a dip of 0.48%. It had closed at 39.35/39.36 on Tuesday.

In the short term, experts said, there could be some impact on the quantum of capital flows coming into the country. “Obviously, there will be some downside pressure on the rupee," said A.V. Rajwade, an independent foreign exchange expert. “The immediate impact on rupee was the fallout of what Sebi has done. And I think the Reserve Bank of India (RBI) will welcome it."

A senior fund manager with a foreign bank in Mumbai, who also did not want to be named, said: “The immediate impact of the Sebi directive will be less capital inflows, as happened this morning. But in the medium term, the capital will continue to come. Sebi did not stop FIIs to invest, it has just curbed the entry of participatory notes."

The rupee has appreciated by 12.5% against the dollar in the current year, mainly due to capital inflows. Foreign portfolio inflows jumped $4.6 billion (Rs18,262 crore) this month to a 2007 total of $17.6 billion, against the 2005 record of $10.7 billion.

Foreign exchange reserves rose to a record $251.33 billion on 5 October, from $247.76 billion a week earlier. The rapid appreciation of rupee made Indian goods costly for domestic exporters in industries such as textiles and leather. Information technology companies also lost money because they earned much of their revenue in US dollars.

However, the strength of the rupee has also helped smoothen the impact of increased crude prices and also importers of capital equipment. The government initiated a slew of measures to reverse the trend, such as relaxing overseas investment limits, tightening its grip on external commercial borrowing by local firms, and by floating special bonds under a market stabilization scheme.

RBI hiked the cash reserve ratio—the amount of reserve the banks are supposed to keep with the bank interest-free—by 50 basis points to 7% to drain out excess liquidity. But these measures failed to arrest rupee appreciation.

The foreign bank fund manager added: “RBI still has to deal with the huge balance of payments surplus, but the central bank’s intervention will be less now and it will be less predict."

The gyrations of the rupee also have kept exporters on the edge. Dilip Kapur, president of Hidesign, a Puducherry-based leather goods maker, said massive FII fund inflow has put pressure on the rupee. “If the rupee continues to appreciate against the dollar, we will have no choice but to raise prices thus affecting our competitiveness," he said. “Last year alone, we saw a 20% appreciation of the rupee against the dollar."

P. Sundararajan, managing director of SP Apparels Ltd, a garment exporter from Coimbatore, was more certain. “The rupee appreciation would shift the focus of the industry to improving efficiency and productivity, but wanted government to intervene further to stem the rise of the Indian currency," he said. “The government should intervene and ensure that rupee does not rise too rapidly."

S. Karunakar, vice-president, Samkrg Pistons and Rings Ltd, said: “During the second quarter of this fiscal, our revenue improved marginally to Rs27.21 crore, from Rs26.76 crore in the year-ago period," he said. “The net profit dipped to Rs1.95 crore, from Rs3.24 crore, mostly owing to rupee appreciation."

Raghu Krishnan and Kavitha Srinivasa in Bangalore, and C.R. Sukumar in Hyderabad contributed to this story.